Thread by @choffstein

1/ A year ago, I heard: "I don't want alternatives in my portfolio."

Today, it's: "I wish you offered 100% alternative portfolios."

A few thoughts on THE PENDULUM and FRICTION.

2/ One of the constants in my career is that the pendulum always seems to swing too far.

Maybe it's human nature.

3/ In finance, I believe it's a mix between information asymmetry and a variation of Gresham's Law.

The advisors I work with compete with other advisors. If opaque alternatives are underperforming, you had better believe there is an advisor down the street selling "simple."

4/ And, when alternatives are outperforming, you had better believe there is an advisor down the street crowing about their unique process of incorporating unique diversifiers.

5/ And so the crowd is largely left chasing because the end investor is, unfortunately, simply not educated well enough on these topics to understand what's actually happening: performance chasing.

6/ Catering to these whims, as an asset manager, can be enticing.

After all, if everyone is clamoring for an all-alternative model today, why shouldn't I give it to them?

Someone else probably will, after all. And don't I think I can build the best one?

7/ But hot money is hot money.

I'm going to have to spend the time to build the model, go through the due diligence process of getting it approved on platforms, and sell it to advisors.

And they're gonna blow out of it as soon as alternatives underperform again.

8/ As frustrating as FRICTION can be in any process, I think it serves a fundamental benefit in preventing any PENDULUM from swinging too far too fast.

FRICTION forces changes to be incremental and over time rather than large and all at once.

9/ Guess what else friction helps with?

Rebalance timing luck.

(You knew I couldn't do a thread without mentioning it.)

Slow, incremental changes are basically what pushes rebalance timing luck towards zero.

10/ So, unless you believe you have an edge in making a big decision right now, friction may be your friend.

I believe this is true in both portfolio construction as well as business.

11/ Anyway, that's enough nonsense. Go back to watching college football or whatever it is people do on their Saturdays.